In January 2008, I spoke with Rona Shuchat, Program Director of Application Outsourcing (AO) Services at IDC, a major technology market research firm, about business trends in the IT industry, specifically in application development services. Near the top of my list was the subject of consolidation. What I meant by consolidation is what has been recently happening with HP EDS and now Dell Perot. Here are some of my opinions on this “fashion trend.”
1. Dell Copies IBM – Why did Dell buy Perot?
There is virtually nowhere for Dell to go in their current business. Dell’s direct-to-consumer business model is no longer unique and overseas competition has overcome their manufacturing cost advantage. To grow, Dell thinks they have to copy HP, who copied IBM, and build out an application services business. However, the low-cost culture at Dell is dramatically different than the quality culture at IBM. This will make it very difficult for Dell to digest Perot Systems and properly manage it. So what should Dell do…see number 2!
2. Fire Dell – Put Perot Systems in Charge
With all the difficulties that Dell has had with their services business, I say Dell should move their executives out of the way and put Perot Systems in charge of all of their services business – now and with future acquisitions. Perot has a proven experience in this market and is positioned to benefit from future government spending and all the dollars that will be spent on universal healthcare.
3. Lemming Syndrome
The trend right now is for every major enterprise vendor to have 3 parts to their business – application services, software products, and hardware. Firms that are missing one or more of these areas will look for acquisitions to fill in the blanks. There is a lot of pressure to do mergers – from big firms looking to corner the IT market and shareholders looking for an exit strategy. But does following the herd make sense? In the short run, merging will allow firms to cut costs, i.e. fire “redundant” employees, while raising prices as competing firms go away. But after the short-term gains, what happens next? Will these firms fall under their own weight…see number 4!
What happens when every Tier 1 company has been put together the same way? Ultimately, the giant Tier 1 firms will experience the clash of cultures – product people are fundamentally different than services people. At some companies, services will triumph and support for products (hardware & software) will be dropped. For other firms, they will spin-off the organizations they spent billions to acquire.
5. Here Comes the Small Fry
Customer frustration at dealing with a limited number of large firms will lead to renewed opportunities for smaller, more focused suppliers. Eventually, the market fad will switch from “diversify” to once again focus on your “core business.” Buyers will now be under the gun to build relationships with boutique firms. Instead of pursuing large projects with large firms, companies will break initiatives into smaller projects and begin to experiment with alternative technologies.
All of this leaves me wondering, … will Dell Perot or any of these multi-billion dollar conglomerates pick up the phone for less than $1 million? and how will they provide the white glove service that comes with application development services?